Three Approaches to Tenant Improvements

tenant improvements in progress

Oftentimes, the space you select for your business needs some work to make it exactly the way you want. There are generally three ways that these tenant improvements can be handled:

  • Turnkey Buildout. With a turnkey buildout, the landlord will complete all modifications to the space to meet the tenant’s requirements.
  • Improvement Allowance. In this case, the landlord provides a set dollar amount for the cost of tenant improvements. If the improvement allowance doesn’t cover all of the costs, the tenant pays the difference.
  • Tenant Cost Only. In some cases, a tenant may decide to pay for all renovations themselves.

Choosing the Right Tenant Improvement Option

From a tenant’s perspective, the first or second option might seem preferable for handling the tenant improvement costs. If the landlord will cover these costs, then that leaves more in the tenant’s pocket to pay for furnishings, equipment, and other start-up expenses. However, the best option depends in part on what improvements needed.

The comfort level of both landlord and tenant in coordinating improvements may also influence whether the landlord or tenant takes the lead. Often, the party with more experience with renovations or strong relationships with contractors will be the one to coordinate the improvements. Taking the lead on construction can also provide direction as to who pays the associated costs.

Allocating Tenant Improvement Costs

Perhaps the most significant factor in deciding which approach to pursue comes down to who pays the costs up front. When a landlord provides the tenant improvements or an allowance, they will build those costs into the rent either through a higher rate or a longer term. Sometimes, the landlord may instead provide a tenant improvement loan to the tenant rather than adjusting rent or the lease term. If a tenant provides their own improvements, though, they can negotiate reduced rent or a shorter lease commitment.

Get Professional Advice on Tenant Improvements

Deciding how best to handle tenant improvements is an important part of negotiating your commercial lease. Give careful consideration to what improvements you need and your capacity for performing the work. A tenant representation broker can help you work through tenant improvement questions and find a workable solution. If you would like to speak to one of our agents about how we can help, please contact us.

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